After holding off on online shopping, Grocery Outlet Holding Corp. has begun exploring options for e-commerce partners.
Discussions with potential third-party online grocery providers are under way, and Grocery Outlet expects to be piloting one or more solutions within months, CEO Eric Lindberg said late yesterday in reporting fiscal 2021 second-quarter results.
“We firmly believe our stores represent the most important growth driver, but we're also exploring complementary ways to reach new customers and deliver value,” Lindberg told analysts in a post-market-close conference call on Tuesday. “Higher demand for grocery e-commerce now provides an interesting opportunity for us to extend our industry-leading value and ‘treasure hunt’ experience. We are excited to begin testing various e-commerce approaches to determine what works best with our unique model.”
Thus far, Grocery Outlet’s unique — and strongly successful — business model has led the Emeryville, Calif.-based chain to forgo online grocery service, as its customer proposition relies on the in-store experience.
Describing itself as an “extreme value” retailer, Grocery Outlet touts big discounts on brand-name products and has said a typical shopper basket is priced about 40% lower than that of conventional grocers and 20% lower than leading discounters. Stores are run by independent owner-operators from the communities they serve, allowing locations to cater closely to changing customer preferences. Shopper savings is achieved through a sourcing model of procuring surplus inventory and product overruns directly from thousands of supplier partners. That includes a changing assortment of products with “WOW!” prices, fostering “treasure hunt” shopping.
However, the online shopping boom triggered by the COVID-19 pandemic has made it clear that consumers want an e-grocery option, according to Lindberg and Grocery Outlet President RJ Sheedy.
“We plan to begin a test-and-learn approach to evaluate various e-commerce solutions such as delivery and buy online, pickup in store [BOPUS],” Sheedy said in the call. “These tests will assess several factors, such as alignment with our unique model, operational and technical considerations and total market opportunity. We are currently in discussions with potential third-party partners, and we look forward to updating you as these tests launch and progress.”
The food-at-home trend spurred during the pandemic also helped sway Grocery Outlet to rethink e-commerce, Lindberg said in response to an analyst question.
“You have listened to us for a couple of years talk about e-commerce, and our attitude is quite simply that stores continue to really represent the most important growth driver for us. But what’s hit us for e-commerce is particularly foods that took about 10 years to go from 1% to 5% penetration and then in two quarters it went up to 10%,” he said. “The reality from our perspective is that it’s not going to go back to 5%, but it’s more likely to go to 15%. So that gives us a lot of confidence. It’s here, and we can explore a way to go out and reach a new customer and deliver what we think are leading values in the entire industry to our existing and new customers.”
It’s Grocery Outlet’s “hope and intention” to launch real-market tests of online grocery solutions “in the next several months,” Lindberg said, noting that retention of the company’s treasure hunt experience will be a key element.
“Delivery, BOPUS, we want to explore both,” he explained. “The adoption for both of those has increased, so we think they’re potentially interesting opportunities or approaches for us. Both of those are in scope of as we’re thinking about a test. Treasure hunt, that’s part of the test also. How well does that translate online? As items are in and out [of stores], does that come across? Do customers see the excitement online as they would walking up and down the aisles of the store? “We’ll get a better read on that once we get out there and market.”
For the second quarter ended July, Grocery Outlet’s net sales declined 3.5% to $775.5 million from $803.4 million a year earlier, when the company recorded a nearly 25% gain. Same-store sales fell 10%, compared with a 16.7% jump in the 2020 quarter.
First-half net sales came in at $1.53 billion, down 2.3% from $1.56 billion in the 2020 half, when Grocery Outlet reported a 24.9% year-over-year increase. Comparable-store sales for the first 26 weeks of 2021 were down 9.1%, compared with a 17.1% gain in 2020.
“We’re pleased to have exceeded our expectations for the second quarter as we lap the elevated sales experience during the early months of the pandemic,” Lindberg said in the analyst call. “Our comparable-store sales were slightly better than expected, at negative 10%, and on a two-year stack basis increased 6.7%. Gross margin and adjusted EBITDA results also exceeded our expectations as we successfully managed the cost pressures facing our business.”
The NOSH (Natural, Organic, Specialty, Healthy) category was a top performer in Q2 and remains a driver in Grocery Outlet’s fresh food expansion, Sheedy reported.
“In fresh, we recently introduced variable-weight produce in all stores, and we are seeing positive results from new prepared products, in both produce and fresh meat,” he said. “To support this assortment expansion, we will adjust our marketing messages to feature both our deep value as well as the convenience of the full shop that we offer. We will also continue to communicate in-and-out deals and fresh product to promote trip frequency. We’ve had great success with prior assortment improvements, and we see additional opportunity to create greater excitement with the next phase of this initiative.”
Grocery Outlet opened 11 new stores in the second quarter, finishing the period with 400 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada, compared with 362 a year earlier.
“We remain pleased that new-store productivity is in line with our expectations, with the trends at our new Mid-Atlantic stores similar to those of the initial entry in Southern California. We are building the foundation for store growth in the East, including investments in purchasing and infrastructure, and we look forward to growing our presence and brand awareness in the region,” Lindberg said. “Of the 36 to 38 stores we plan to open this year, we expect that three to five of those openings will be in the East, including our first store in New Jersey. We know that we have tremendous runway to expand our footprint based on the power of our value proposition and the portability of our model. As we look forward, we remain committed to our stated target of 10% annual unit growth.”
At the bottom line in the second quarter, net income was $19.6 million, or 20 cents per diluted share, compared with $29.3 million, or 30 cents per diluted share, in the prior-year period. Adjusted net earnings were $23.3 million, or 3 cents per diluted share, versus $32 million, or 32 cents per diluted share, in the 2020 quarter, Grocery Outlet said. Analysts, on average, had projected adjusted earnings per share of 24 cents, with estimates ranging from 22 cents to 27 cents, according to Refinitiv.
First-half net income totaled $38.5 million, or 39 cents per diluted share, compared with $42 million, or 43 cents per diluted share, a year ago. On an adjusted basis, net earnings for the 26 weeks fell to $46.5 million, or 47 cents per diluted share, from $60.7 million, or 62 cents per diluted share, in the 2020 half.
Also on Tuesday, Grocery Outlet announced the appointment of Arvind Bhatia as vice president of investor relations, reporting to Chief Financial Officer Charles Bracher. Before joining Grocery Outlet, Bhatia held similar roles at At Home Group and Dave & Buster’s Entertainment after working as a research analyst at various Wall Street firms.